Why You Should Recalibrate Your Building Insurance Valuation Now

CAUSES OF CONSTRUCTION COST INCREASES

1. The COVID consumer consumption explosion – Federal Grants to stimulate construction, other grants, less consumer recreational spending (travel restrictions, limited nights out, lock down – allowing people to save their money), people at home deciding to renovate,
2. Loss of timber supply – 40% of eastern Australia timber lost in bushfires, California and other areas similar losses, timber mills shut down due to COVID restrictions, European bark beetle,
3. Increased shipping costs – increased 10 fold in 2021, shipping container shortages,
4. Limited steel supply – flow-on effect to steel as a substitute for timber framing, limited workforce and manufacturing due to lock down restrictions,
5. Limited workforce, where backpackers previously provided a ready source of labour, then travel restricted by COVID,
6. Disasters have used up construction materials, labour, and resources.

Recommendation – obtain new Building Insurance Valuations, as earlier valuations were carried out in an environment of an expected ‘steady’ increase in construction costs, not the current unknown volatile environment.

EFFECT ON INSURANCE

1. Insurers are attempting to claw back their losses from recent payouts for floods, bushfires and similar catastrophes,
2. Insurers are cautious on who they choose to insure in order to reduce their future exposure to risk,
3. Insurers are asking for asbestos reports, safety reports, maintenance plans to determine the risk of each property.

Consequence – rapid rise in premiums, and insurers being more selective, with many schemes having difficulty in obtaining quotes for insurance, and when they can, are significantly higher for properties that are flood or bushfire affected land, previous high claims history, unable to prove proactive maintenance, or have insufficient funding.

HIGHER PREMIUMS

1. In my view it is acceptable and prudent for insurers to increase the last valuation by an amount of around 2% pa higher than the expected increase in construction costs, however if left uncalibrated would have owners over-paying their premium (ie over 10% for five years),
2. I have carried out hundreds of peer reviews of insurance valuations and in my experience around 75% have been over-valued.

HOW CAN OWNERS PROVE THEY ARE A LOWER RISK

1. Maintenance planning and scheduling – a formal Plan that list Items and the extent of work that has to be carried out on each Item (including from specialists – lifts, fire, painting),
2. Proof that maintenance has been carried out – ie, records showing the date that roof gutters were cleaned, storm water pits and pipes jetted out, roof flashing checked, mechanical systems have been properly serviced and recorded,
3. The property is safe from a negligence perspective – obtaining a Safety Report with proof that the recommended control measures have been carried out,
4. That asbestos is properly managed – obtaining an Asbestos Register and Asbestos Management Plan with the recommended control measures carried out.

It is common sense… if you were an insurer, which property would you insure… the one with a good maintenance regime, no safety issues, limited disaster exposure, an appropriate asbestos management plan, and a recent building insurance valuation, or the property without?

FURTHER CONSIDERATIONS

Insurers also focus on the maintenance regime of each strata and community scheme to see if proper maintenance is regularly untaken. Schemes that have a poor record of maintenance or are slow to respond, tend to attract a higher premium.

A proper re-valuation may not necessarily result in a higher recommended sum insured, particularly if the last valuation was older than 4 years, or the previous valuer has adopted the ‘cautious’ (over-valued) approach, but to the detriment of the owners.

NEXT STEPS

Get a Building Insurance Valuation from the right consultant. Avoid consultants that

1. State ‘combined’ experience (ie does that include the receptionist in their ‘combined’ years experience),
2. Do not provide a break up of professional fees, demolition and removal of debris, gst, escalation during the periods of the insurance term, reconstruction and certification.

The right consultant will

1. Physically inspect the property for the initial assessment, (beware of consultants that do not inspect the property),
2. Have experience in strata and community compliance legislation, and understands multi layered schemes (varies in each State),
3. Have a depth of experience in the current construction costs,
4. Have Professional Indemnity insurance of at least $10M.

Remember to

1. Pay an appropriate fee – some consultants cut corners by not inspecting the property, avoid the false sense of prudency; ie owners try to save a few hundred dollars on a valuation, but end up paying thousands more in higher premiums over many years,
2. Depending on the type of property, have the valuations carried out periodically (rough rule, residential property up to $5M each 3 to 5 years, for greater than $5M then in the range of annual to three yearly).

Wal Dobrow, Director, BIV Reports 1300 55 18 30

Note, BIV Reports Pty Limited commenced as Building Insurance Valuations Pty Limited.

Wal Dobrow has a Cert IV is WHS and is a specialist in risk, safety and negligence. He has been a trusted advisor to the strata profession for over 35 Years.

BIV Reports provides strata compliance reports, including Asbestos Registers and Management Plans, Insurance Valuations, and Safety Reports and is one of the largest provider of 10 Year Plans in WA.

© BIV Reports 2023